Fed Officials Reassess U.S. Outlook Amid Global Weakness … Federal Reserve officials are starting to reassess their outlook for the economy as global weakness and disappointing data on American consumer spending test their resolve to raise interest rates this year. San Francisco Fed President John Williams last week said he will trim his U.S. estimate because of slower growth abroad. Atlanta's Dennis Lockhart said Jan. 12 that he advocates a "cautious" approach to rate increases and inflation readings "may be pivotal." Both are voters on the Federal Open Market Committee in 2015 and repeated that rates could be raised in the middle of the year. – Bloomberg

Dominant Social Theme: We WILL tighten … we just don't know when.

Free-Market Analysis: We never believed the Fed would tighten. And we don't. Not really. We've regularly made statements to that effect.

If Fed officials do "tighten" – we figure they'll find some other way to loosen. The money printing goes on. And now here come reports to the effect that the "recovery" (we didn't believe that, either) is not all it's cracked up to be. "Global weakness" has taken its toll on the US domestic economy.

This is an article that proposes that US central bankers need to communicate more efficiently and at shorter intervals. But we'll show that if this communication is not open and truthful, the amount and timeliness of it won't matter.

Here's more:

Weakness in Europe, Japan and China has dimmed the outlook for the world economy, with the International Monetary Fund and World Bank reducing their estimates for global growth. Last month's decline in U.S. retail sales, the biggest in almost a year, suggests that Americans may be cautious about spending a windfall from cheaper gasoline even as the job market improves.

"You have some cracks appearing in the official line that lower oil prices are good for the U.S. economy and that the U.S. can grow even if the global economy is weakening," said Thomas Costerg, an economist at Standard Chartered Bank in New York. "There are headwinds."

… Fed officials will discuss the outlook when they meet … though they aren't scheduled to release their next set of economic projections until March.

Even small cuts to their forecasts are likely to reinforce the message that the FOMC can be "patient" as it plans to raise interest rates for the first time since 2006. Chair Janet Yellen indicated in her December press conference that rates are unlikely to be raised "for at least the next couple of meetings," or not before late April.

Federal funds futures markets now show only a 15 percent chance the benchmark interest rate will be 0.5 percent or higher in June, compared with about a 30 percent probability at the start of the year.

Macroeconomic Advisers LLC, the St. Louis-based economic forecasting firm, has pushed its estimated date for the first rate increase back to September from June.

The article goes on to point out that employment numbers are strong and that growth, even pared, could begin to drive wage inflation. Thus, the possibility of a rate hike continues to exist in mid-summer despite any perceived weakening.

Even so, it looks like Fed officials are backing off of previous targets and, according to the article, "Things have gotten very interesting, and people will be hungry for explanations from the voice of the committee."

What are the real problems the US economy faces? On the one hand, there may be increased demand for US assets as growth overseas falters. On the other, the world economy may continue to slump, reducing "good" inflation and reducing consumption further as consumers get the message that they ought to wait to buy. The personal consumption expenditures price index is not rising fast enough to suit the Fed and has "lingered below the Fed's 2 percent goal for 31 straight months."

The markets are reflecting doubts about "the Fed's ability or willingness to get inflation back to target," said Michael Pond, head of global inflation market strategy at Barclays in New York. "The more the Fed dismisses this, the more credibility is lost."

The article concludes by suggesting that the Fed is losing credibility with its seeming reversal on the economy and its inflation projections. The solution, according to some insiders, is better and more frequent communication.

Which is the issue we indicated we intended to address in this analysis. Honestly, the real problem is that very little of what the Fed says (in aggregate) has any relationship to … reality.

The so-called recovery is likely a purely monetary one, and we've often described it. In fact, just yesterday, we presented an analysis of a former BIS official, William White, who is arguing that rates have been held too low globally for decades.

Our analysis jibes. It is money printing in a variety of forms that debases currency and causes great asset bubbles that deflate with ruinous effects. In that article we also pointed out as we have before that there is thousand trillion dollars in derivatives contracts outstanding.

No market in the history of the world has survived intact and this market won't, either. We can't imagine what the financial markets will look like once derivatives default.

This Fed speculation is a kind of sideshow. The fundaments of Western economic finance are illusory… and don't represent reality. Sure you can – and should – take profits now (if possible), as the "Wall Street Party" continues into the next year and perhaps beyond.

But when was the last time you read about a thousand trillion in derivatives and what that will mean sooner or later for the world's economy?

When was the last time you read a good explanation about how loose money fuels the business cycle and how in any case the statistics that the Fed officials use to decide on the volume and price of money are inaccurate and biased?

When was the last time you read that price fixing only removes the competitive discipline of the Invisible Hand and causes market disasters – and that what central bankers constantly do is fix the price of money?

More communication would certainly help, but not if it is communication of the modern kind that avoids real truths.

The reality is that modern markets are built on the shifting sands of mathematical illusions. The reality is that debasing the currency cannot create prosperity. The reality is that fixing the price and volume of money by force – as central bankers do – cannot create market efficiencies but only further distortions and impoverishment.